California and 15 other states recognize medicinal marijuana and allow its sale. But since federal law has not conformed, the drug law mismatch directly impacts taxes. The IRS claims to only be the messenger, telling Harborside Health Center it can't deduct its expenses.

The culprit is the tax code, since Section 280E disallows any business deductions---no matter how legitimate---incurred in trafficking in controlled substances. What's controlled? Federal law---the Controlled Substances Act---governs. Medicinal or otherwise, marijuana is on the list. Even the U.S. Supreme Court says there's no exception, even for medically necessary marijuana. See U.S. v. Oakland Cannabis Buyers’ Co-Op.

The tax law should be changed, but in the interim, my favorite way around this unjust snafu is other lines of business. Don't just dispense medical marijuana, the law seems to say. A U.S. Tax Court ruling says marijuana dispensaries can legally deduct expenses associated with all activities except dispensing marijuana. See Californians Helping to Alleviate Medical Problems Inc. v. Commissioner.

Expenses of selling marijuana may be verboten, but the dispensary was alsoengaged in the business of care-giving. All thoseexpenses were OK. It turned out only about 10% of the premises were used to dispense marijuana, so most of the rent was deductible.